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Managerial Economics

Some Important Questions and Answers for the Final Examination
Managerial Economics
Section A: Objective Type
Part One:
Multiple choices:
1
...
Macroeconomics
b
...
Recession
d
...
A comprehensive formulation which specifies the factors that influence the demand for
the product
...
Market Demand
b
...
Demand Function
d
...
It is computed when the data is discrete and therefore incremental changes is measurable
a
...
Arc Elasticity
c
...
Derived Demand
Answer: c (Point Elasticity)
4
...
Demand
b
...
Producer Goods
d
...
The curve at which satisfaction is equal at each point
a
...
Cardinal Measure of Utility

c
...
Budget Line
Answer: c (The Indifference Curve)
6
...

a
...
Past Costs
c
...
Sunk Costs
Answer: a (Future Cost)
7
...
Monopoly
b
...
Equilibrium
d
...
Total market value of all finished goods & services produced in a year by a country’s
residents is known as
a
...
Gross National Product
c
...
Real GDP
Answer: c (Gross Domestic Product)
9
...
Government Expenditure
b
...
Income Approach
d
...
The market value of all the final goods & services mad within the borders of a nation in
an year
a
...
Subsidies
c
...
GNP

Answer: c (GDP)
Part Two:
Short Notes type Questions:
1
...

Answer
Introduction
Definition of 'Arc Elasticity'
The elasticity of one variable with respect to another between two given points
...
Arc elasticity
is also defined as the elasticity between two points on a curve
...
Arc elasticity computes the percentage change between two points in relation to the
average of the two prices and the average of the two quantities, rather than the change from
one point to the next
...
Hence, the term "arc elasticity
...
An example will help illustrate this
...
4005
...
3636 (Again we leave this in decimal form)
Then we'd calculate the percentage change in price:
[Price(NEW) - Price(OLD)] / Price(OLD)
By filling in the values we wrote down, we get:

[9 - 10] / 10 = (-1/10) = -0
...

PEoD = (0
...
1) = -3
...
636
...
6 is a lot different from 2
...
Arc elasticities are a way of removing this problem
...
So when we're
calculating Price Elasticity of Demand we still use the basic formula:
PEoD = (% Change in Quantity Demanded)/(% Change in Price)
However how we calculate the percentage changes differ
...
By doing so, we will get the same answer (in absolute terms) by
choosing $9 as old and $10 as new, as we would choosing $10 as old and $9 as new
...
This benefit comes at the cost of a more difficult calculation
...
1538 * 2 = -0
...
3707 (or -37% in percentage terms)
...
3707
...
When we calculate our final answer, we will see that the elasticities will be the
same and have the same sign
...
I recommend calculating each of the measures
using the step-by-step fashion I detail in the previous articles
...
You could call the points A and B or 1 and 2 if you like, but old and new works just
as well
...

In a future article, we will look at using calculus to compute elasticities
...


Explain the law of ‘Diminishing Marginal Returns’
...

Investopedia explains 'Law of Diminishing Marginal Returns'
Consider a factory that employs laborers to produce its product
...
At this point, each additional employee provides less and less
return
...

LAW OF DIMINISHING MARGINAL RETURNS:
A principle of short-run production stating that as a firm combines more of a variable input
with a fixed input, the marginal product of the variable input eventually declines
...
It offers an
explanation for the law of supply and the positive slope of the market supply curve
...
This law
has a direct bearing on market supply, the supply price, and the law of supply
...

The direct relation between price and quantity produced is the essence of the law of supply
...
The table to the right presents the hourly production of
Gargantuan Tacos as Waldo's TexMex Taco World employs
different quantities of labor, the key variable input for short-run
taco production
...

For the first two workers marginal product actually increases
...

For the third worker on, however, marginal product decreases
...
The marginal product of the
third worker is 25 tacos, compared to 30 tacos for the second worker
...
For the fifth worker, the marginal product falls
to 15
...
Marginal product
eventually reaches zero for the eighth worker and even declines for the ninth and tenth
workers
...

Why It Works
The primary reason the marginal product of this variable input declines is the fixed input
...
In this taco production
example, the size of the taco-producing kitchen is fixed
...
As Waldo's TexMex Taco World employs additional
workers, the kitchen becomes increasingly crowded
...
Only so many workers can use the lettuce-chopping
block to chop lettuce
...

While adding additional workers can and do increase total taco production, the extra
production attributable to these workers is bound to fall as the capacity of the fixed input is
approached
...
Nine workers

produce less than eight workers
...
The marginal
products of the ninth and tenth workers are negative
...
Higher prices are required because
production cost is greater, which occurs because the productivity of the variable input (that is,
marginal product) is less
...
Because these subsequent workers are less productive, the firm needs both to
produce the same output as the other
...

Because the law of diminishing marginal returns causes a decline in input productivity,
additional production requires more inputs at a higher cost per unit or output produced
...


Three Product Curves
The law of diminishing marginal returns is reflected in the shapes and slopes of the total
product, marginal product, and average product curves
...


This graph presents the three product curves that form the foundation of short-run production
analysis
...
Click the [TP] button to highlight this curve
...




Marginal Product Curve: The MP curve is the marginal product curve
...
The MP curve indicates how the total
production of TexMex Gargantuan Tacos changes when an extra worker is hired
...




Average Product Curve: The average product curve, labeled AP, indicates the
average number of TexMex Gargantuan Tacos produced by Waldo's workers
...
The negatively-sloped portion of the
AP curve is indirectly caused by the law of diminishing marginal returns
...


The Law of Supply
While the law of diminishing marginal returns pops up throughout the study of economics, it
is essential to an understanding of supply and the law of supply
...
If the production cost increases, then the
sellers need a higher supply price
...

This law of diminishing marginal returns is the counterpart of the law of diminishing
marginal utility
...


3
...

Answer
Introduction
An Introduction to Non-Cooperative Game Theory
It is probably fair to say that the application of game theory to economic problems is the most
active area of theory in modern economics
...

To some extent, the tradition of game theory in economics is an old one
...

Analysis of Stackelberg duopoly and monopolistic competition have always been based on
models and intuitions very much like those of game theorists
...
"
I
...

A
...

B
...
In such
settings, each person's welfare depends, in part, on the decisions of other individuals "in the
game
...
In Cournot duopoly, each firm's profits depend upon its own output decision and
that of the other firm in the market
...
In a setting where pure public goods are consumed, one's own consumption of the
public good depends in part on one's own production level of the good, and, in
part, on that of all others
...

c
...


d
...

For example, a case where there is no interdependence it that of a producer or
consumer in perfect competition
...
Game theory can still be used in such cases, but with little
if any advantage over conventional tools
...
The Prisoners' Dilemma game is probably the most widely used game in socialscience
...
The "original" prisoners dilemma game goes something like the following
...
Each
is known to be guilty of a minor crime (say jay walking), but it is not possible to
convict either of the serious crime unless one or both of them confesses
...
The prisoners are separated
...

c
...

D
...
Each cell of the game matrix contains payoffs, for A and B, in years in jail (a bad)
...
)
b
...
Each individual will rationally attempt to minimize his jail sentence
...
iii
...
10 < 12 and 1 <2
...

d
...
Note that the same strategy yields the lowest sentence for Prisoner B
...
If
A does not testify, than B can reduce his sentence from 2 to 1 year by testifying
...

e
...
The (testify, testify) strategy pair yields 10 years in jail for each
...
No player
has an incentive to independently change his own strategy at a Nash equilibrium
...
vi
...
(2 < 10)
...

g
...
[Of course, society at large may regard this particular dilemma as optimal
insofar as two dangerous criminals are punished for real crimes
...
The prisioner's dilemma game can be used to model a wide range of social dilemmas
...
Competition between Bertrand (price setting duopolists
b
...
(Pollution)
c
...
Contract Breach/Fraud
e
...

F
...

However, these assumptions can be dropped without changing the basic thrust of the analysis
because essentially the same conclusions can be reached for N-person games where the
players have an infinite number of strategies (along a continuum) and play for any finite
number of rounds
...
Note that the mathematical requirements for completely specifying a game are met in the
Prisoner's Dilemma game
...
The possible strategies are completely enumerated
b
...

c
...
(A player is said to have perfect
information if he knows all details of the game
...
)
II
...
Several other noteworthy games can also be represented using 2x2 payoff matrices
...
A zero sum game is a game where the sum of the payoffs in each cell is zero
...
(Individuals with no training in economics seem to regard all
economic activities as zero sum games
...
Trade is a positive sum game
...
Coordination games are games where the "diagonal" cells (top left or bottom
right) have the essentially identical payoffs which are greater than those of the off
diagonal payoffs
...
(All drive on the left side of the road or all on
the right have higher payoffs than some drive on each side of the road
...
iii
...
("Chicken Out,""Chicken Out,") yields a
higher score although both players are embarrassed
...
The
scores for mutual non-chicken are so low that the off diagonal cells (bottom left or
top right) are potential equilibria
...
As in two person models of exchange, 2 person - 2 strategy games are very useful models
of interaction and interdependency between individuals because the capture essential features
of the choice settings of interest
...
PD-like Games with Continuous Strategy Options
A
...

Players on a team may work more or less
...

Such two person game can be represented mathematically by specifying a payoff (or utility)
function that characterizes each player's payoffs as a function of the strategy choices of the
players in the game of interest
...
Example: consider a symmetric game where each player has the same strategy set and the
same payoff function
...

a
...

b
...
Each player in a Nash game attempts to maximize his payoff, given the strategy
chosen by the other
...
The implicit
function theorem implies that his or her best strategy X1* is a function of the
strategies of the other player X2, that is that X1* = x1(X2)
...
iii
...

d
...
At the Nash equilibrium, both reaction curves intersect, so that
X1** = x1(X2**) and X2** = x2(X1**)

IV
...
Let R be the "reward from mutual cooperation," T be the "temptation of defecting from
mutual cooperation," S be the "suckers payoff" if a cooperator is exploited by a defector, and
P be the "Punishment from mutual defection
...

B
...
Acme has a total cost curve equal to C = 5Q and Apex has a total cost curve of C
=10 Q
...
Prices are determined by their combined
production
...

C
...
Each maximizes a utility function defined over other
consumption, C, the volume of their own noise, and that of their neighbor's (a bad), U1 =
u(C1, N1, N2)
...

a
...

b
...
Show the effect that a simultaneous increase in each neighbor's income has on the
Nash equilibrium of this game
...
What is ‘Third Degree Discrimination’?
Answer
Introduction
Third-Degree Price Discrimination:
A form of price discrimination in which a seller charges different prices to groups that are
differentiated by an easily identifiable characteristic, such as location, age, sex, or ethnic
group
...
This is one of three price
discrimination degrees
...

Third-degree price discrimination occurs if a seller charges different prices to two or more
different buying groups with different demand elasticities
...
Examples of third-degree
price discrimination abound throughout the economy
...
Children, or better yet, families with
small children tend to have lower demand elasticities for goods such as eating at restaurants
and staying at motels than others
...
In this way, a seller is able to charge each group what they, and they alone, are
willing to pay
...

Monopoly is quite adept at price discrimination because it is a price maker, it can
set the price of the good
...
Perfect
competition, with no market control, does not do well in the price discrimination
arena
...
The different price elasticity means that buyers are willing and able to
pay different prices for the same good
...
The price
charged to each group is the same
...
Segmentation means that
the buyers in one market cannot resell the good to the buyers in another market
...
Those buyers
that would be charged a higher price could simply purchase the good from those
who purchase it at a lower price
...
The hypothetical firm
used for this example is the Shady Valley Cineramaplex, which has 20 movie screens and is
the only movie theater in the greater metropolitan Shady Valley community
...
It also provides the opportunity to practice price
discrimination
...
The two groups are:



Youthful movie patrons, those in the 13-18 year age group, are not very
responsive to ticket prices
...




By way of contrast, older folks, those in the 50-plus age range, are more selective
in their ticket purchases and thus have a relatively elastic demand
...


Age is the key factor that lets the Cineramaplex segment and seal each market demand
...

Oldsters can be charged another price and given tickets that only admit elderly individuals
...

Third-DegreenPrice Discrimination

The goal of the Cineramaplex, like any firm, is to maximize profit
...
The curve labeled MC in the exhibit to the right is the
marginal cost curve for the production of this good
...
However, because the Cineramaplex can identify two groups of movie
patrons, each with a different price elasticity of demand, there are two different marginal
revenue curves on the other side of the decision
...
And with
each demand curve comes a corresponding marginal revenue curve
...

Consider how the Cineramaplex sets the price for the two groups
...
The relatively steep demand curve indicates a
relatively low elasticity
...

The Cineramaplex maximizes profit from this group by equating marginal revenue
and marginal cost, then charging the corresponding price that the youngsters are
willing to pay
...
The price charged the youngsters is $9 per ticket
...
The relatively flat demand curve indicates a relatively high elasticity
...

The Cineramaplex maximizes profit from this group by equating marginal revenue
and marginal cost, then charging the corresponding price that the oldsters are
willing to pay
...

The price charged the oldsters is $5
...


The obvious conclusion from this analysis is that the price charged to each group is different
...
This, of course, is possible because the two groups have different
price elasticities of demand
...

The Other Two Degrees
Third-degree price discrimination is one of three forms of price discrimination
...



First-Degree Price Discrimination: Also termed perfect price discrimination,
this form exists when a seller is able to sell each quantity of a good for the highest
possible price that buyers are willing and able to pay
...




Second-Degree Price Discrimination: Also termed block pricing, this form
occurs when a seller charges different prices for different quantities of a good
...
Block pricing of
electricity, in which electricity prices depend on the amount used, is the most

common example
...

Section B
Case Let 1
The war on drugs is an expensive battle, as a great deal of resources go into catching those
who buy or sell illegal drugs on the black market, prosecuting them in court, and housing
them in jail
...
There's another cost to the war on drugs, however, which is the
revenue lost by governments who cannot collect taxes on illegal drugs
...
Easton attempted to calculate how much
tax revenue the government of the country could gain by legalizing marijuana
...
5 grams (a unit) of marijuana sold for $8
...
70
...
90 profit for a unit
of marijuana would not last for long
...
Of course, this doesn't happen because the product is
illegal; the prospect of jail time deters many entrepreneurs and the occasional drug bust
ensures that the supply stays relatively low
...
90 per unit of
marijuana profit a risk-premium for participating in the underground economy
...
Stephen T
...
If you could collect on every cigarette and ignore
the transportation, marketing, and advertising costs, this comes to over $2 billion on
Canadian sales and substantially more from an export tax, and you forego the costs of
enforcement and deploy your policing assets elsewhere
...
However, it's quite likely that
the demand for marijuana would change from legalization
...
Legalization
would eliminate this risk, causing the demand to rise
...
However, if
legalized, governments can control how much marijuana is consumed by increasing or
decreasing the taxes on the product
...

When considering legalizing marijuana, there are many economic, health, and social issues
we must analyze
...
With governments scrambling to find new sources of revenue
to pay for important social objectives such as health care and education expect to see the
idea raised in Parliament sooner rather than later
...
Plot the demand schedule and draw the demand curve for the data given for Marijuana in
the case above
...
On the basis of the analysis of the case above, what is your opinion about legalizing
marijuana in Canada?
Case Let 1
Solution
1
...

Demand is "the quantity of a commodity that will be required at any given price over some
given period of time"
...
" (Stanlake 155) This characteristic can be
shown by a demand curve
...
A good that is in greater demand do to
income increases is known as a normal good
...
When this situation occurs the demand curve is positive
sloping
...
The graph below is a sample demand curve, where the demand schedule for the
quantity of toilet paper demanded is graphed
...
As can be seen from looking at this graph, it is negatively sloping
...
The whole
demand curve "theory" is based on human behavior
...

In reality, if the price of a good rises the income (or assets) of the consumer will decrease
...

Consumers can do two things; if the good is a normal good (previously defined), they would
buy less of the good; if the good is an inferior good, they would buy more of the good
...
The slope of the demand curve can be explained in terms
of the income and substitution effects
...
Suppose an
experiment is run to determine the quantity demanded of a particular product at different
price levels, holding everything else constant
...


Demand Schedule
Price Demanded
5
4
3
2
1

Quantity
10
17
26
38
53

The demand curve for this example is obtained by plotting the data:
Demand Curve
By convention, the demand curve displays quantity demanded as the independent variable
(the x axis) and price as the dependent variable (the y axis)
...
For basic analysis, the
demand curve often is approximated as a straight line
...
Demand functions for a straight-line demand curve take the
following form:
Quantity = a - (b x Price)
where a and b are constants that must be determined for each particular demand curve
...
Shifts in the Demand Curve When there is a change in an influencing factor
other than price, there may be a shift in the demand curve to the left or to the right, as the
quantity demanded increases or decreases at a given price
...
Some of these
demand-shifting factors are:


Customer preference



Prices of related goods etc
...
Price and quantity
are the two components which form the demand curve
...

When prices vary, quantity is altered
...
When more goods are consumed due to a drop in
prices there is an expansion in demand and when less is consumed due to an increase in price,
it is said to be a contraction in demand
...
When there is a change in any one of
these determinants of demand there will be an alteration in the demand curve
...
When
more is purchased at the same price, the demand curve will shift to the right as demand
increases
...
How the determinants of demand can alter the demand curve
are summarised below:
1
...
Income: an increase or decrease of consumer income will affect their disposable income
and discretionary spending trends- increasing or decreasing demand
3
...
A larger population means more
consumers and greater demand and vice a versa
...
Income distribution: an even distribution of income will mean an increase for demand of
luxury goods by low and middle income groups whereas an uneven distribution would
lead to increased demand for products
...
On the basis of the analysis of the case above, what is your opinion about legalizing
marijuana in Canada?
There is no doubt that legalizing marijuana has its advantages, mainly in terms of increased
revenues to the government due to corresponding increase in tax collections
...
A legalized regime would also ensure greater control on
the market demand and the consequent supply of marijuana
...
This includes increased incidence of ill health
amongst the population and could increase black marketing in case the prices of marijuana
are kept at a very high level
...

Case let 2
Companies that attend to productivity and growth simultaneously manage cost reductions
very differently from companies that focus on cost cutting alone and they drive growth very
differently from companies that are obsessed with growth alone
...
In the slow growth electro-technical business, ABB has doubled its
revenues from $17 billion to $35 billion, largely by exploiting new opportunities in
emerging markets
...
But it has also reduced employment in North America
and Western Europe by 54,000 people
...

Everyone knows about the staggering ambition of the Ambanis, which has fuelled
Reliance's evolution into the largest private company in India
...
What people may not be equally
familiar with is the relentless focus on cost reduction and productivity growth that pervades
the company
...
Its sales and distribution cost, at 3 per cent of revenues, is about a third
of global standards
...
5 cents per kilowatt-hour; well below Indian utility costs, and about 30 per cent
lower than the global average
...

A Bias for Growth
Comparing major Indian companies in key industries with their global competitors shows
that Indian companies are running a major risk
...

There is nothing wrong with this bias, as Reliance has shown
...
While they love the sweet of growth, they are unwilling to
face the sour of productivity improvement
...
Its strongest competitor, Nirma, also grew at over 25 per cent per
annum in revenues but maintained its labour productivity relatively stable
...
In contrast,
Coca Cola, worldwide, grew at around 7 per cent, improved its labour productivity by 20
per cent and its return on capital employed by 6
...
The story is very similar in the
information technology sector where Infosys, NIIT and HCL achieve rates of growth of
over 50 per cent which compares favorably with the world's best companies that grew at
around 30 per cent between 1994-95
...
Its focus on growth has helped it double revenues every two years
...
For
now, this is a challenge Indian InfoTech companies seem to be losing
...
At the same time IBM Microsoft
and SAP managed to improve this ratio by 17 per cent
...

The cement industry, which has focused on productivity rather than on growth, has done
very well in this dimension when compared to their global counterparts
...
They show a growth of 24 per cent in return on capital

employed while international players show only 8
...
Labour productivity, which
actually fell for most industries over 1994-96, has improved at 2
...

The engineering industry also matches up to the performance standards of the best in the
world
...
The
company shows a healthy excess of almost 30 per cent over WACC, displaying great future
promise
...
The only note of caution: Indian engineering
companies have not been able to improve labour productivity over time, while
international engineering companies like ABB, Siemens and Cummins Engines have
achieved about 13
...
The Pharmaceuticals industry is where the problems seem to be the worst, with
growth emphasized at the cost of all other performance
...
9 per cent per annum and labour productivity at 7
per cent
...
Ranbaxy is not an exception; the bias for growth at the cost
of labour and capital productivity is also manifest in the performance of other Indian
Pharma companies
...
In the Indian textile industry, Arvind Mills was once
the shining star
...
Between 1994 and
1996, it grew at an average of 30 per cent per annum to become the world's largest denim
producer
...
Despite the excellent performance in the past, there are warning signals for
Arvind's future
...
5 per cent, implying it barely manages
to satisfy its investor's expectations of return and does not really have a surplus to re invest in the business
...
Unfortunately, Arvind's
deteriorating financial returns over the last few years is also typical of the Indian textile
industry
...
Nike, VF Corp and Coats Viyella showed a growth in
their returns on capital employed of 6
...
Even in absolute returns on assets or on
capital employed, Indian companies fare a lot worse
...

Questions
1
...
Discuss whether Indian Consumer goods industry is growing at the cost of future
profitability
...
Discuss capital and labour productivity in engineering context and pharmaceutical
industries in India
...
Is textile industry in India performing better than its global competitors?
Case Let 2
Solution
1
...
It is the ability to cook sweet
and sour that under grids the remarkable performance of companies likes Intel, GE, ABB and
Canon
...
For
example, it has built up a 46,000 employee organisation in the Asia Pacific region, almost
from scratch
...
It is the hard squeeze in the north and the west that generated the resources to
support ABB's massive investments in the east and the south
...
Reliance has built its spectacular rise on a similar ability
to cook sweet and sour
...
Reliance's employee
cost is 4 per cent of revenues, against 15 to 20 per cent of its competitors
...
It has
continuously pushed down its cost for energy and utilities to 3 per cent of revenues, largely
through 100 per cent captive power generation that costs the company 4
...
Similarly, its capital cost is 20 to 30 per cent lower than its international peers due to
its legendary speed in plant commissioning and its relentless focus on reducing the weighted
average cost of capital (WACC) that, at 13 per cent, is the lowest of any major Indian firm
...
Discuss whether Indian Consumer goods industry is growing at the cost of future
profitability
...
Commercial purpose does not include use by a person of goods bought and used
by him exclusively for the purpose of earning his livelihood by means of selfemployment
...
The above provision reveals that a person claiming himself as ‘consumer’ should satisfy
that There must be a sale transaction between the seller and the buyer
2
...
The buying of goods must be for consideration
4
...

5
...

However, the term ‘consumer’ does not include a person who obtains any goods for resale or
for any commercial purpose
...
Persons
buying goods either for resale or
For use in a large-scale profit making activity will not be ‘consumers’ entitled under the Act
...
A Booz &
Company study finds out the trends that will shape its future

Consider this
...
It’s
today the fastest-growing segment in the skincare market
...
Who could have thought of
ready acceptance for anti-ageing creams and lotions some ten years ago? For that matter, who
could have thought Indian consumers would take oral hygiene so seriously? Mouth-rinsing
seems to be picking up as a habit — mouthwash penetration is growing at 35 per cent a year
...

Consumption patterns have evolved rapidly in the last five to ten years
...
He’s looking for products with better
functionality, quality, value, and so on
...
A new report by Booz & Company for the Confederation of Indian Industry (CII),
called FMCG Roadmap to 2020: The Game Changers, spells out the key growth drivers for
the Indian fast moving consumer goods (FMCG) industry in the past ten years and identifies
the big trends and factors that will impact its future
...
2 per cent of the country’s GDP)
...
It identifies
robust GDP growth, opening up of rural markets, increased income in rural areas, growing
urbanisation along with evolving consumer lifestyles and buying behaviours as the key
drivers of this growth
...
Additionally, if some of the factors play out
favourably, say, GDP grows a little faster, the government removes bottlenecks such as the
goods and services tax (GST), infrastructure investments pick up, there is more efficient
spending on government subsidy and so on, growth can be significantly higher
...

Says Booz & Company Partner Abhishek Malhotra: “The Indian GDP per capita is low but
many Indian consumer segments which constitute rather large absolute numbers are either
close to or have already reached the tipping point of rapid growth
...
”

Based on research on industry evolutions in other markets and discussions with industry
experts and practitioners, Booz & Company has identified some important trends that will
change the face of the industry over the next ten years
...
The trend can be observed prominently in the top two income groups — the rich
with annual income exceeding Rs 10 lakh, and the upper middle class with annual income
ranging between Rs 5 lakh and Rs 10 lakh
...
They are well-informed about various product
options, and want to buy products which suit their style
...

While these two income groups account for only 3 per cent of the population, the report
estimates that by 2020 their numbers will double to 7 per cent of the total population
...
Similarly, the upper middle segment will be a
population of about 70 million in 2020, which is more than the population of the UK
...
“We have seen companies focused on selling
primarily to the mid segments
...
Players
will do well to clearly separate their offerings for the upper and mid segments,” says
Malhotra and adds that the two should be treated as separate businesses with a dedicated team
and strategy for each
...
Discuss capital and labour productivity in engineering context and pharmaceutical
industries in India
...
These costs seem particularly exorbitant when dealing with the drug marijuana,
as it is widely used, and is likely no more harmful than currently legal drugs such as tobacco
and alcohol
...
In a recent study for the Fraser
Institute, Canada, Economist Stephen T
...
The study estimates that
the average price of 0
...
60 on the street, while its cost
of production was only $1
...
In a free market, a $6
...

Entrepreneurs noticing the great profits to be made in the marijuana market would start their
own grow operations, increasing the supply of marijuana on the street, which would cause the
street price of the drug to fall to a level much closer to the cost of production
...
We
can consider much of this $6
...
Unfortunately, this risk premium is making a lot of criminals,
many of whom have ties to organized crime, very wealthy
...

Since decades it has generated huge revenues , provided millions of jobs , spawned ground
breaking researches in fields of medical science and drugs development , while constantly
maintaining the competitive edge against not only the international competitors but also other
technology driven domestic sectors such as automobiles , IT and ITES , and consumer
electronics
...
Traditionally , this sector has been successful
in keeping itself immune from uncertainties hitting the market , and clocking in large profits ,
sustained growth and development making it the flagship of Indian economic growth and
development
...
The industry provides simultaneous inspiration and
stimulation of huge array of support sectors such as chemical industry , industrial appliance
manufacturing , plastic industry , along with forming backbone of many advanced research
lab and institutes
...
Overview of Pharmaceutical Industry
The modern structure of the pharmaceutical is based on the foundation established during
the years of World War II
...
The industry is among those rare business /enterprise sector that have always
stayed firmly in tune with latest technological inventions and scientific research , often
providing them ethical and material support and purpose
...
Drug research and
development has always been the core competency area of pharmaceutical industry , the field
towards which its maximum resources and funds are allocated However , analyzing the trends
from past fifty years , it is observed that although the researches have become more
sophisticated and extensive the number of new drugs entering in market have maintained a
gradual decline that has been more or less consistent
...
During the 50s , American pharma industries were most dominating force in the
global pharmaceutical and drug market
...
Is textile industry in India performing better than its global competitors?
The Indian textile industry has been one of the foremost contributors to the country's
employment, exports, and GDP
...
However we are still far away from that target
...
Globally, the Indian industry is recognized for its competitive advantages,
especially in the cotton segment
...
5 lakh crore during the eleventh Plan period
...
It also
assured

continued

interest

subsidy

through

the

Textile

Upgradation

Fund
...
Speakers talk about getting more efficient, delivering more value added products,

and adopting new technology to meet the new challenges
...

Currently the textile industry is one of the worst hit sectors in India, as almost 50 percent of
the industry is dependent on exports
...
However, if we go back a bit when the world
was still growing we didn’t have any great performances by the textile industry in exports
...
15 percent
in terms of US dollars over the same period last year, while in terms of rupees it fell by 10
...
This shows that it is not only the exchange rate which is killing us, even in terms of
dollars we had not grown at all
...
86
percent in terms of dollar and 16
...
It clearly shows that we are
losing not only on the aggregate basis, but are losing more on the value addition basis
...
Firstly, I looked at the basic raw material – cotton fiber, which looks very
promising
...
We are the second largest producer today and have also become
the second largest exporter of cotton
...
However, the shocking news is that it is not necessarily true – the relative
advantage of India vis-à-vis competing countries like Bangladesh, Pakistan, Vietnam,
Indonesia, and Thailand has come down, with the gap between Indian cotton price and that of
the other countries reducing over the last five years due to the acceptance of Indian cotton by
other nations and large scale exports from India
...
Road
transport is much more expensive than sea transportation, for e
...
it costs $50 (Rs 2,500) to
transport 150 bales from Mumbai to China and it costs Rs
...

Further, in a falling global market where prices were falling across the board, the government
hiked the minimum support price (MSP) of raw cotton by 40 percent, making the raw

material expensive for our local industry, when on the other hand the price of end products
were falling
...
To top the agonies of the industry,
in February 2009 the government introduced with retrospective effect five percent license
against exports of cotton, hence making our cotton cheaper for our competing nations – We
need to rethink whether we want value addition on Indian cotton
...

On the manmade fiber side, due to our inherently high raw material prices and import duties,
we are clearly out priced
...

Secondly, let us analyze the technology access and its cost
...
However, apart from ginning and
partly spinning, we are largely dependent on imported technology
...
The Chinese textile machinery
industry is much more developed and, in fact, is selling all over the world including India
...
Despite the Textile Upgradation Fund, the effective
rates are about 7-8 percent, which is high compared to today’s international funding rates
...
Due to the recession interest rates have crashed
globally; but India rates have only fallen marginally and due to the risk premium going up the
positive impact is further reduced
...
However, in absolute terms we are higher than many of our competitors like
Bangladesh, Pakistan, and other developing countries and if adjusted for productivity we are
higher than all major textile nations like China, Indonesia, Thailand, and Vietnam
...

The Government has a minimum guarantee employment program of 100 days (NREGS)
...


Fourthly, we have the ‘cost of power’, which is probably the most expensive amongst all the
nations globally
...
On the contrary, most other
nations have power costs in the range of 5-7 cents per unit
...

Fifthly, we have the issue of markets
...
Turkey has the whole of
Europe at its doorstep, the ASEAN countries can trade amongst themselves with preferential
duty structure and even Korea is giving them preference
...
We are, on the contrary, opening up our markets to
the low and competitive nations like Bangladesh, Pakistan, and Sri Lanka with duty free
access to our growing consumer population
...

The question is, under these circumstances how will the industry move ahead? In the absence
of internal accruals, loss of fancy of equity investors, and no FDI – how will the industry
invest? And without equity how will debt come in? The large investment and turnover targets
are fast becoming a pipe dream
...

And for those who think that it is only the exports that are affected and the local industry is
doing fine, just have a close look once again
...
The prices in retail selling may have gone up in some cases, but that is due to
the strength of branding and marketing, not due to manufacturing costs
...
In the case of lower export prices and weak demand, the exporters try to
shift their capacities to the domestic segment, thereby putting pressure on the domestic
market, which is not deep enough to absorb any additional capacity
...

The Indian textile industry will no doubt survive and move along by the strengths of its
traditional position and domestic market
...
We forget that dismantling of quotas (remember that China has not been fully let
loose) does not mean increase of global demand; it just means re-organization of sourcing
strategies on the basis of ‘buy from the best place’
...
The fact that we have
become a big exporter of raw cotton and are selling to all our competing textile nations
including China does not change the equation greatly
...
India has been a leader in cotton yarn for many years now, and it was
expected that we move on the textile chain upwards
...

It is well accepted that textiles is one of the worst affected industries in India, its downturn
started much earlier at the end of 2007 when US economy went into trouble
...
Some of the
significant government policies that worked against the industry last year were:


Increase of MSP for seed cotton by 40 percent



Introduction of five percent export incentive for raw cotton exports



Reduction of duty drawback rates



Removal of interest subvention of 4 percent and later restoring to 2 percent

It is difficult to find anything special done for the industry over the last year or even in the
2009 budget
...
Still worse, huge incentives are
pending from the various departments of the government for over a year and this is adding to
the already tight liquidity woes in the face of huge losses
...

Section C
Applied Theory
1
...
Critically explain and examine the statement
...
While that sounds
promising, the current form of globalization, neoliberalism, free trade and open markets are
coming under much criticism
...
In democratic countries, they are shaping and affecting the ability of
elected leaders to make decisions in the interests of their people
...
This is to the detriment of most people in the world, while
increasingly fewer people in proportion are prospering
...
Margaret
Thatcher's slogan of “there is no alternative” rings sharply
...
" It usually
benefits the larger, wealthier countries whose big companies are looking to expand and sell
their goods abroad
...

Globalisation has made the world a much smaller place
...
Today these goods and services can
travel further and faster so that - for instance - products from all over the world can be found
at your corner shop
...

The scale and pace of this kind of trade has only increased over time, and has become a very
powerful tool
...

Free Trade - who is paying the price
The act of opening up economies is known as "free trade" or "trade liberalisation
...

Doing this allows goods and services from everywhere to compete with domestic products
and services
...

When trade is a weapon - tariffs and subsidies
Part of the problem is that trade is not always equal
...
When countries put restrictions, such as tariffs, on goods from other countries,
imported goods become more expensive and less competitive than goods from their own
country
...
This means that
governments give money or other forms of support to local or domestic businesses, to make
sure that they are cheaper over imported products and services
...
And
while these businesses continue to grow, smaller or local producers, especially in many
poorer countries - those that need support the most - are being destroyed
...
Many wealthy countries in Europe, as well as the US
and Japan use these tactics to support their own domestic economies, making it impossible
for smaller, or less developed countries to gain a foothold in the global marketplace
...

Ii
...
Liberal trade and the concept of comparative advantage
The multilateral trading system is based on the philosophy of liberal trade, aiming to promote
mutually beneficial specialisation and to enhance the potential for economic growth, thereby
contributing to higher standards of living5
...
The
theory of comparative advantage was developed by David Ricardo in 1817 as the
fundamental analytical explanation for the source of gains from trade
...

B
...
However, this ruleoriented structure is only one aspect of the system, which has to be viewed at the same time
as a binding contract among 109 countries7, introducing an equilibrium of rights and
obligations that the contracting parties have voluntarily accepted as being in their mutual
interest
...
Concessions are bound in the sense that
contracting parties cannot set tariff levels which exceed them and have to grant compensation
to affected parties if they withdraw them
...
The concept of nullification or impairment
Benefits accruing to contracting parties under the General Agreement (or other covered
agreements in the framework of the WTO) have to be preserved in order to maintain the
negotiated equilibrium
...
The multilateral trading rules have to be understood as aimed at ensuring this
equilibrium by limiting the scope for countries to undermine benefits through resort to other,
often less transparent, trade measures
...
Nullification, impairment
or impediment resulting from "non-violating" measures can be introduced to the WTO
dispute settlement mechanism8
...
The concept of transparency
The concept of transparency is an essential concept in democratic legal systems
...
From an economic
point of view, it aims at providing essential economic information to consumers, as well as
ensuring the equality of competitive conditions among producers
...
It refers more particularly to the transparency of both national trade

and trade-related measures and the way such measures are administered
...

GATT Article X calls for the prompt publication of domestic and international trade
regulations made effective by any contracting party, in order to enable governments and
traders to become acquainted with them
...
The TBT Agreement calls for the publication and notification of proposed
standards and technical regulations likely to have significant effects on the trade of other
parties, and which are not substantially based on relevant international standards10, while the
SPS Agreement requires the prompt publication of all adopted sanitary and phytosanitary
regulations11
...
Additional concepts incorporated into the trading system
Despite the importance of the objective of liberal trade for the multilateral trading system,
this objective is complemented by provisions whose aim is to accommodate other policy
objectives, such as environmental protection, although the level of accommodation of such
other objectives remains a matter of discussion
...
The GATT Agreement and the new WTO Agreement also
recognise the existence of other policy objectives, and the preamble to the latter refers
explicitly to the objective of sustainable development
...
Similarly, the SPS Agreement calls for national sanitary and
phytosanitary measures which are based on international standards, although Members may
introduce measures which result in higher levels of protection if there is a scientific
justification12
...

The concept of risk assessment is an environmental concept which is used in risk
management and is relevant to the precautionary approach
...
SPS Article 5 invites Members to ensure that their
measures “are based on an assessment
...
”, taking into account, on the one hand, “available scientific evidence; relevant processes
and production methods; relevant inspection, sampling and testing methods; prevalence of
specific diseases or pests; existence of pest- or disease- free areas; relevant ecological and
environmental conditions; and quarantine or other treatment”; and on the other hand relevant
economic factors, such as “the potential damage in terms of loss of production or sales in the
event of the entry, establishment or spread of pest or disease; the costs of control or
eradication in the territory of the importing Member; and the relative cost-effectiveness of
alternative approaches to limiting risks”
...
What role does a decision tree play in business decision-making? Illustrate the choice
between two investment projects with the help of decision tree assuming hypothetical
conditions about the states of nature, probability distribution and corresponding payoffs
...
Decision analysis is the
general

name

that

is

given

to

techniques

for

analysing problems

containing

risk/uncertainty/probabilities
...

Example
A company faces a decision with respect to a product (codenamed M997) developed by one
of its research laboratories
...
It is estimated that test marketing will cost £100K
...

If M997 is successful at the test market stage then the company faces a further decision
relating to the size of plant to set up to produce M997
...


The marketing department have estimated that there is a 40% chance that the competition will
respond with a similar product and that the price per unit sold (in £) will be as follows
(assuming all production sold):
Large plant

Small plant

Competition respond

20

35

Competition do not respond

50

65

Assuming that the life of the market for M997 is estimated to be 7 years and that the yearly
plant running costs are £50K (both sizes of plant - to make the numbers easier!) should the
company go ahead and test market M997?
Problem Solution
Although the above example is somewhat simplified it plainly represents the type of decision
that often has to be made about new products
...

To enable us to see what is going on consider the figure below where we have drawn the
decision tree for the problem
...


Decision nodes represent points at which the company has to make a choice of one
alternative from a number of possible alternatives e
...
at the first decision node the company
has to choose one of the two alternatives "drop M997" or "test market M997"
...

Terminal nodes represent the ends of paths from left to right through the decision tree
...
Once that has
been done the solution procedure is quite straightforward
...
One tip that may help you to draw decision trees is
to ask yourself the question "What happens next?" at each point in the tree as you draw it
...
This is
necessary because it simply may not be profitable to build any plant (large or small) even if
the product is successful in test market
...

Note that it is important for the decision tree to be drawn so that there is a unique path in the
tree from the initial node to each of the terminal nodes
...
,12
...

Although the decision tree diagram does help us to see more clearly the nature of the problem
it has not, so far, helped us to decide whether to drop M997 or whether to test market it (the
decision we are trying to make!)
...

In these steps we will need to use information (numbers) relating to future sales, prices, costs,
etc
...
Investigating how our decision to test
market or not might change as these figures change (i
...
sensitivity analysis) can be done
once we have carried out the basic calculations using our assumed figures
...
What you do depends on three things: the weather (windy, rainy or
sunny); how much money you have (rich or poor) and whether your parents are visiting
...
If they're not visiting
and it's sunny, then I'll play tennis, but if it's windy, and I'm rich, then I'll go shopping
...
If they're not visiting
and it's rainy, then I'll stay in
...

We call such diagrams decision trees
...
Note that the leaves are always decisions, and a particular decision might be at the
end of multiple branches (for example, we could choose to go to the cinema for two different
reasons)
...
The decision tree will then enable us to make our decision
...
Then this path through our
decision tree will tell us what to do:

and hence we run off to play tennis because our decision tree told us to
...
That is, there are no values that the weather, the parents
turning up or the money situation could take which aren't catered for in the decision tree
...

Reading Decision Trees
There is a link between decision tree representations and logical representations, which can
be exploited to make it easier to understand (read) learned decision trees
...
then statements), and the
implications are Horn clauses: a conjunction of literals implying a single literal
...

Of course, this is just a re-statement of the original mental decision making process we
described
...
It will therefore be important for us to be able to read the decision tree the agent
suggests
...
If we phrase the above question slightly differently,
we can see this: instead of saying that we wish to represent a decision process for what to do
on a weekend, we could ask what kind of weekend this is: is it a weekend where we play
tennis, or one where we go shopping, or one where we see a film, or one where we stay in?
For another example, we can refer back to the animals example from the last lecture: in that
case, we wanted to categorise what class an animal was (mammal, fish, reptile, bird) using
physical attributes (whether it lays eggs, number of legs, etc
...
g
...

Learning Decision Trees Using ID3
Specifying the Problem
We now need to look at how you mentally constructed your decision tree when deciding what
to do at the weekend
...
For example, you might know that your parents really like going to the
cinema, and that your parents are in town, so therefore (using something like Modus Ponens)
you would decide to go to the cinema
...
Imagine that you remembered all the times when you had a really good
weekend
...
A month ago, it was raining and you were penniless, but a trip to the
cinema cheered you up
...
This information could have guided your decision
making, and if this was the case, you would have used an inductive, rather than deductive,
method to construct your decision tree
...

We can state the problem of learning decision trees as follows:

We have a set of examples correctly categorised into categories (decisions)
...
We want to use the examples to learn the structure of a decision tree which
can be used to decide the category of an unseen example
...
All we have to do is make sure every situation is catered for down some branch of
the decision tree
...

The basic idea
In the decision tree above, it is significant that the "parents visiting" node came at the top of
the tree
...
However, it is likely that the number of weekends the
parents visited was relatively high, and every weekend they did visit, there was a trip to the
cinema
...
This means that there is no evidence in favour of
doing anything other than watching a film when the parents visit
...
Hence
we can put this at the top of the decision tree, and disregard all the examples where the
parents visited when constructing the rest of the tree
...

This kind of thinking underlies the ID3 algorithm for learning decisions trees, which we will
describe more formally below
...

Entropy
Putting together a decision tree is all a matter of choosing which attribute to test at each node
in the tree
...
Information gain is itself calculated using a measure
called entropy, which we first define for the case of a binary decision problem and then
define for the general case
...
Tom Mitchell puts this quite well:
"In order to define information gain precisely, we begin by defining a measure commonly
used in information theory, called entropy that characterizes the (im)purity of an arbitrary
collection of examples
...
If all the balls were in a single box, then
this would be nicely ordered, and it would be extremely easy to find a particular ball
...
If we were going to define a measure
based on this notion of purity, we would want to be able to calculate a value for each box
based on the number of balls in it, then take the sum of these as the overall measure
...
This is the basis for the general entropy measure, which is
defined as follows:
Given an arbitrary categorisation, C into categories c1,
...
e
...
Remembering that entropy calculates the disorder in the data, this low score is
good, as it reflects our desire to reward categories with few examples in
...
e
...

Hence we see that both when the category is nearly - or completely - empty, or when the
category nearly contains - or completely contains - all the examples, the score for the
category gets close to zero, which models what we wanted it to
...

Information Gain
We now return to the problem of trying to determine the best attribute to choose for a
particular node in a tree
...
Note that the values of attribute A will range

over a set of possibilities which we call Values(A), and that, for a particular value from that
set, v, we write Sv for the set of examples which have value v for attribute A
...

An Example Calculation
As an example, suppose we are working with a set of examples, S = {s1,s2,s3,s4} categorised
into a binary categorisation of positives and negatives, such that s1 is positive and the rest are
negative
...
Finally, suppose that:
s1

takes

value

v2

for

A

s2

takes

value

v2

for

A

s3

takes

value

v3

for

A

s4 takes value v1 for A
To work out the information gain for A relative to S, we first need to calculate the entropy of
S
...
These are given as: p+ = 1/4 and p- = 3/4
...
415) = 0
...
311 = 0
...
Next, we need to calculate the weighted
Entropy(Sv) for each value v = v1, v2, v3, v4, noting that the weighting involves multiplying
by (|Svi|/|S|)
...
This means that:
Sv1 = {s4}, sv2={s1, s2}, sv3 = {s3}
...
In our calculation, we only
required log2(1) = 0 and log2(1/2) = -1
...
811 - (0 + 1/2 + 0) = 0
...

The ID3 algorithm
The calculation for information gain is the most difficult part of this algorithm
...
It uses information gain to measure the attribute to put in each node, and
performs a greedy search using this measure of worth
...


Choose the root node to be the attribute, A, which scores the highest for information
gain relative to S
...


For each value v that A can possibly take, draw a branch from the node
...


For each branch from A corresponding to value v, calculate Sv
...




If Sv contains only examples from a category c, then put c as the leaf node
category which ends that branch
...
Then
put a new node in the decision tree, where the new attribute being tested in the
node is the one which scores highest for information gain relative to S v (note: not
relative to S)
...


The algorithm terminates either when all the attributes have been exhausted, or the decision
tree perfectly classifies the examples
...
Suppose we want to train a decision tree using the
following instances:
Weekend (Example)
W1
W2
W3
W4
W5
W6
W7
W8
W9
W10

Weather Parents Money Decision (Category)
Sunny
Yes
Rich
Cinema
Sunny
No
Rich
Tennis
Windy
Yes
Rich
Cinema
Rainy
Yes
Poor
Cinema
Rainy
No
Rich
Stay in
Rainy
Yes
Poor
Cinema
Windy
No
Poor
Cinema
Windy
No
Rich
Shopping
Windy
Yes
Rich
Cinema
Sunny
No
Rich
Tennis

The first thing we need to do is work out which attribute will be put into the node at the top
of our tree: either weather, parents or money
...
737 -(2/10) * -2
...
322 -(1/10) * -3
...
4422 + 0
...
3322 + 0
...
571
and we need to determine the best of:
Gain(S, weather) = 1
...
571 - (0
...
4)*Entropy(Swind) - (0
...
571 - (0
...
918) - (0
...
81125) - (0
...
918) = 0
...
571

-

(|Syes|/10)*Entropy(Syes)

-

(|Sno|/10)*Entropy(Sno)

= 1
...
5) * 0 - (0
...
922 = 1
...
961 = 0
...
571

-

(|Srich|/10)*Entropy(Srich)

-

(|Spoor|/10)*Entropy(Spoor)

= 1
...
7) * (1
...
3) * 0 = 1
...
2894 = 0
...
As an
exercise, convince yourself why this scored (slightly) higher than the parents attribute remember what entropy means and look at the way information gain is calculated
...
Ssunny = {W1, W2, W10}
...
The categorisations of W1, W2 and W10 are
Cinema, Tennis and Tennis respectively
...
Hence we put an attribute node here, which we will leave blank
for the time being
...
Again, this is not empty, and
they do not all belong to the same class, so we put an attribute node here, left blank for now
...
So, we need to calculate the
values for Gain(Ssunny, parents) and Gain(Ssunny, money)
...
918
...
In effect, we are interested only in this part of the table:
Weekend (Example) Weather Parents Money Decision (Category)
W1

Sunny

Yes

Rich

Cinema

W2

Sunny

No

Rich

Tennis

W10

Sunny

No

Rich

Tennis

Hence we can calculate:
Gain(Ssunny,

parents)

=

0
...
918 - (1/3)*0 - (2/3)*0 = 0
...
918 - (|Srich|/|S|)*Entropy(Srich) - (|Spoor|/|S|)*Entropy(Spoor)
= 0
...
918 - (0/3)*0 = 0
...
918 = 0
Notice that Entropy(Syes) and Entropy(Sno) were both zero, because Syes contains examples
which are all in the same category (cinema), and Sno similarly contains examples which are
all in the same category (tennis)
...

Given our calculations, attribute A should be taken as parents
...
Remembering that
we replaced the set S by the set SSunny, looking at Syes, we see that the only example of this is
W1
...

Also, Sno contains W2 and W10, but these are in the same category (Tennis)
...
Hence our upgraded tree looks like this:

Finishing this tree off is left as a tutorial exercise
...
Decision trees suffer from this, because they are trained to stop when they have
perfectly classified all the training data, i
...
, each branch is extended just far enough to
correctly categorise the examples relevant to that branch
...
As summarised by Tom Mitchell, these
attempts fit into two types:


Stop growing the tree before it reaches perfection
...


The second approach has been found to be more successful in practice
...
See Chapter 3 of Tom Mitchell's
book for a more detailed description of overfitting avoidance in decision tree learning
...
As elaborated by Tom Mitchell, decision tree learning is best suited
to problems with these characteristics:


The background concepts describe the examples in terms of attribute-value pairs,
and the values for each attribute range over finitely many fixed possibilities
...




Disjunctive descriptions might be required in the answer
...
In particular, it will
function well in the light of (i) errors in the classification instances provided (ii) errors in the
attribute-value pairs provided and (iii) missing values for certain attributes for certain
examples

---